Increasing government revenues from the extractive sector in Sub-Saharan-Africa

The extractive sector is a major source of domestic revenue for sub-Saharan African countries that can help in achieving  the Millennium Development Goals. This paper examines the factors hindering these countries from generating the optimum revenue from the extractive industries. It identifies the following as the main impediments:

• investment conditions - as capital intensity is high and investment decisions are taken for the long term, stable investment conditions are crucial for the generation of long-term government revenue from the sector
• unpredictable taxation systems, legal uncertainty with regard to mining licences, lack of predefined reclamation obligations and political instability, have all contributed to far less geological exploration
• lack of infrastructure - inadequate energy and transport infrastructure hinders expansion of the extractive sector
• mining tax system - many states lack the capacity to develop sound taxation systems and to negotiate favourable agreements with enterprises. The rapid change in tax systems in combination with easing world market prices may chase away potential investors who fear a lack of regulatory stability
• ineffective tax collection – unsound tax and mining administration due to shortages of equipment and poor training, as well as corruption and unclear divisions of responsibility. Lack of uniformity in the pricing of minerals leads to variations in the calculation of royalty payments, and in many cases, such taxes as capital gains tax are simply not paid
• revenue management for sustainable development - many countries have difficulty collecting government revenues at times of high world market prices and distributing them in an anti-cyclical way

The paper concludes that:

• the development of the extractive sector is a long-term exercise since it is a highly capital-intensive sector subject to long-term investment cycles.  Countries in sub-Saharan Africa need a great deal of support in facing the challenge of high capital intensity
• countries need help in strengthening their negotiating positions vis-à-vis foreign investors